27 January 2020: Services back in expansion

Services back in expansion

27th January: Highlights

  • Despite strong data, rate cut remains in the balance
  • Markets await Fed as virus threat eases risk appetite
  • German “green shoots” fail to arrest euro slide

Manufacturing contraction remains despite improvement

This week’s Bank of England Monetary Policy Committee meeting to be held on Thursday will certainly mark the return of the Central Bank to the forefront of the economy.

Held on the same day as the UK’s departure from the EU becomes official, it is still uncertain whether there will be a rate cut. Since several members of the MPC led by Governor Mark Carney made comments about a possible easing of monetary policy, the data has been generally supportive of the market and this has led to confusion amongst traders as to what the condition of the economy really is.

It has been said many times by Central Bankers, not just from the Bank of England, that the decisions on monetary policy are not made overnight, and one month’s data or a negative series amongst generally positive longer-term factors won’t sway their decisions.

Yet, the pound gyrated last week, as first one set of data was released, then another.

Friday’s generally supportive activity data which confirmed an improvement in both services and manufacturing failed to ignite too much anticipation that the cut was not imminent, and the pound ended lower on the day.

Manufacturing rose from 47.5 in December to 49.5 in January. Still in contraction but a step in the right direction. The vast services sector also improved, moving back into expansion as December’s reading of 50 was eclipsed by a January read of 52.9

Last week overall, the pound was mixed as often happens in the lead up to an MPC meeting where there is the possibility of a change in monetary policy. It traded between 1.2962 and 1.3175, closing at 1.3076.

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Virus uncertainty affecting global trade

The U.S. will release a raft of data this week but two events stand head and shoulders above the rest; The release of the first cut of Q4 GDP, while not expected to have changed from Q3 year on year and a retrospective, is nonetheless a significant indicator for the economy going forward.

The FOMC will be more noteworthy for the press conference held by Chairman Jerome Powell following the meeting than any possible action on short term rates which are almost certainly be left unchanged.

Powell is expected to provide advance guidance of the FOMC’s belief that the balance of risks is fairly stable, while trade and the global economy will probably cause greater concern to the Central Bank than domestic events.

The Coronavirus outbreak in China has spread rapidly and if it continues at its current rate, there are likely to be more than 200k cases in China by this time next week.

The entire financial market is in a state of flux, with no real direction for any of the major currencies as both short-termism and the number of Central Bank meetings driving caution.

Both manufacturing and services output remain in positive territory although manufacturing fell from 52.4 in December to 51.7 in January, while services improved from 52.8 to 53.2 over that same period.

Last week, the dollar traded between 97.95 and 97.39, closing at 97.87. Having closed well above support at 97.40, the index may be set for a test of the next resistance at 98.20 if the data and FOMC comments are favourable.

German activity shows clear improvement

Well, it seems to have been coming for a very long time, but, finally, there has been a significant improvement in the level of manufacturing activity in the German economy. The manufacturing sector rose from 43.7 to 45.2 while services continued their support for the overall economy rising from 52.9 to 54.2 leading the composite activity index to 51.1 after having barely been in expansion in December.

That allowed the combined Eurozone output data for manufacturing to rise from 46.3 to 47.8. Services fell marginally to 52.2 from 52.8, leaving the combined data unchanged at 50.9, slightly below market expectations.

After the ECB meeting was able to offer nothing better than a yearlong strategic review of its tools and practices, the data provided some welcome relief to the market.

With the level of expectation in the market low, traders remained in “glass half empty mode” being more concerned about services output stalling than the rise in manufacturing.

In fact, the euro suffered on Friday, falling to a low for the year so far of 1.1020, closing at 1.1028. The 1.10 level is now perilously close although there is rumoured to be buying interest between 1.1010 and 1.1020 as protection of option barriers are seen.

The euro made a high of 1.1118 last week, but the concerns over a dent to global activity if the Coronavirus outbreak either spreads or lasts a long time in China concerns investors.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”